06 July 2016

Prompted by thinking about hidden environment costs I had the intuition that a carbon tax could fix it. The premise was that, if we make carbon-producing activities more expensive, the market will regulate these down, giving a fair chance to “greener” options to replace them.

Then I started reading about what carbon tax is and I am no longer so sure. I haven’t turned against it, but I’m realizing that the issue is a lot more complicated than I thought. Intuitively, I still feel that carbon tax is beneficial, but have less conviction as I’m realizing that the devil is in the details.

In this post, I’ll try to lay down my intuitions and assumptions and cross-reference them with public information I found.

How did I imagine carbon tax? Well, when an activity creates hidden environment cost part of which can be measured in carbon emissions, the activity is taxed at a certain rate per amount of emissions. The tax revenue can then fund carbon-cleaning activities such as planting forests, which can reduce the carbon in the atmosphere to remove the excess.

Such strategy depends on the following assumptions:

  1. We can accurately measure the carbon impact of an activity.

    This is arguably possible for certain activities, and in other cases there could be an upper bound, which might be reasonable. I am not worried much about this assumption, as even if we underestimate the emissions, having at least some carbon tax will help to a degree. I’d assume that the cost of carbon emissions increases as the overall emissions increase so removing 50% of the carbon might reduce the burden by 80+%

  2. The government will direct the tax revenue towards carbon cleaning.

    I think this is extremely risky assumptions and I do not think that the government would want to do it. Any government might say “Hey, these money that you paid me for dumping carbon - I have a better use of them, to build hospitals and schools, for example.” The government might be right about it, but letting them slide will open the door to them cheating in the future. Governments change every once in a while, and a benevolent government might give way to another which doesn’t care about the environment.

  3. We can accurately measure carbon cleaning activities.

    I am not certain if that’s the case but I’m willing to give it the benefit of the doubt. Currently, there are markets for carbon offsets, with third party evaluations. Even if the carbon offsets are not perfectly measured now, the measurement can improve in the future as awareness grows.

  4. Removing carbon for place A will be effective in cleaning the mess created at place B.

    The supporting argument for this assumption is that CO2 goes up in the atmosphere, where it can commingle with other carbon. I feel that this assumption might be partially true, and that even it isn’t exactly true, the whole premise of removing carbon makes sense. Eventually as carbon gets depleted, the carbon offset market will address place B.

Looking at the assumptions above - I think that dedicating resources to cleaning up carbon emissions is a viable strategy to removing the carbon damage to the environment - I’m just not convinced that a carbon tax would be effective way to implement it. The main reason is that I believe that governments would redirect the money.

If we assume that the government is looking after the public good, and might find ways to spend the carbon-tax income on other social needs, shoudn’t we be OK with that? I’m not sure. Social good is great as a single objective to aim for, but in the case of multiple dependent commodities such as social good and environment damage, the relative conversion rates between the two might differ through time. As environment damage increases, so does its marginal cost. This kind of optimization will converge to a situation with a lot of environment damage, balanced by a productive society.

But the natural environment is the base on top of which humanity has built its civilization. I believe there will be a lot of secondary negative effects on humanity’s wealth from high environment damage. I also think that environment damage will undermine the meaning of wealth and devalue it.

My preference would be to close the loop from carbon emissions to carbon offsets as quickly as possible. I would not endorse spending carbon tax money on non-carbon social needs. I just don’t think this works in the long term. Going through government to create carbon tax might work but creates a longer solution cycle, requiring the money to go through the government, where they are at risk of being redirected.

What are the alternatives? One is that the government might require certain heavy carbon creators to become carbon neutral, by them buying carbon offsets. This will raise their price and hurt wealth a bit in the short term, but might actually decrease emissions. The government can serve as the watchdog, and has fewer chances to redirect the money. In the long term this will also stimulate the carbon offset market, making it cheaper to offset carbon. The hard part about such approach is that it may have a lot of logistic difficulties and it might undermine the government.

Another alternative is for consumers to start choosing carbon neutral products. This will also stimulate the carbon offset market and might cause producers to find ways to eliminate emissions rather than offsetting them. This focuses the effort on a small percent of the population, and will unlikely be effective, other than raise awareness of the issue. Still, this might be a good first step, in order to get people prepared about the extra cost of offsetting the carbon emissions.

Yet another alternative is for the government to encourage frugality. This will reduce environment impact immediately through reduction of consumption, and it will open up resources for supporting the extra cost of carbon offsets.

If we remember the “reduce, reuse, recycle”, then “carbon tax” is “recycle” while frugality is “reduce”.

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